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Global carbon markets have shrunk in value by 60% since 2011

In 2011, carbon markets traded a total of €96 billion worth of pollution allowances and carbon credits. In 2012, the figure was €62 billion. In 2013, it fell to €38.4 billion. The price of EUAs (EU Allowances) has fallen from €18 in 2011 to €5.

Those are the findings of Thomson Reuters Point Carbon’s review of the carbon markets in 2013, under the headline “Global carbon market contracts by 38% in 2013 as prices and volumes drop.”

The collapse in the UN’s “flexible mechanisms”, including the clean development mechanism, is even more severe. The spot price for CERs (Certified Emissions Reductions) on the European Energy Exchange is currently €0.35 per tonne of carbon dioxide. (In August 2013 it was €0.61.) The UN flexible mechanisms now account for 1% of the value of the world’s carbon markets. And investment in new CDM projects has ground to a halt.

Point Carbon notes that the EU Emission Trading System dominates world carbon markets with 88% of volume and 94% of value. There are other carbon markets, in North America and China, for example. And China’s markets are potentially huge. Five of seven planned carbon markets were launched in China in 2013, in Guangdong, Beijing, Shanghai, Shenzhen and Tianjin.

But without meaningful emission reductions targets, the price of carbon will remain low, as Anders Nordeng, Point Carbon’s Senior Carbon Analyst, explains:

“The main explanation for the falling prices in carbon markets around the world is the very modest emission reduction targets adopted for the period up to 2020. Without ambitious climate targets there is no need for deep emission reductions and carbon prices will remain at low levels. However, if the goal to limit global warming to two degrees shall be met, more dramatic cuts are needed over the next decades. The international negotiations towards a new climate agreement scheduled to be adopted in Paris in 2015 will be a litmus test on the political willingness among large emitters to make the required emission reductions.”

Ecosystem Marketplace’s review of REDD in 2013 is titled, “Supply-Side Success, Demand-Side Dilemmas”. Ecosystem Marketplace explains that as well as a series of “productive meetings” at the UN level during 2013,

private-sector conservationists were securing endangered rainforest at an unprecedented rate – in part because they thought the UNFCCC would be further along now than it is. As a result, the year ended with global agreement on how to move forward with REDD in under the UNFCCC, but with more than 150 private projects struggling to find buyers and a handful of regional initiatives in various states of development.

Ecosystem Marketplace then dives into a review of its coverage of carbon markets in 2013. The word “demand” appears three times in the review. Once in the headline, once in a sub-heading and once in this sentence:

With voluntary demand in doubt, we examined Microsoft’s policy of charging itself an internal carbon fee that it uses to buy offsets around the world.

Despite the headline, Ecosystem Marketplace’s review of 2013 is about the supply side, not the demand side: The generation of potentially very large amounts of REDD carbon credits in a market faced with massive oversupply.

Meanwhile, Bloomberg New Energy Finance (BNEF) predicts that EU carbon prices will rise in 2014, from just below €5 to €7.50, as a result of the EU’s efforts to address oversupply by “backloading” auctions of allowances. (The EU will postpone auctions of EUAs that would have been auctioned in 2014-2016.)

Point Carbon’s Nordeng is more cautious in his carbon price predictions for 2014:

“If policy makers now follow up with the actual implementation of backloading, as well as with structural reform of the carbon market, we expect European carbon prices to remain stable around €5, or possibly pick up this year.”

Guy Turner, chief economist and head of commodities at Bloomberg New Energy Finance, compares carbon markets in recent years to a roller coaster:

“Carbon markets have been on a roller coaster over the last few years and we continue to see a stomach-churning ride ahead. The value of the market peaked at around EUR 100bn in 2011 and then plummeted to around EUR 40bn in 2013. Thanks to backloading in the EU ETS, the track should turn upwards again in 2014, potentially reaching new highs of EUR 180bn by 2016. The roller coaster could well take another dip downwards towards 2020 if the backloading rules remain in place, as they would force supply to increase again in the latter years of the decade.”

Backloading is not a long-term solution to the oversupply problem because the allowances will be actioned anyway in a few years’ time. But Turners final sentence is fascinating and reveals a great deal about carbon markets:

“For compliance players, this volatility will be unwelcome. But for speculators with a sense of adventure and good timing, they could prove tempting in 2014.”

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Here is Konrad Hanschmidt, head of the carbon analysis team at Bloomberg New Energy Finance, talking about carbon markets in 2013 and 2014:

2013, put it in context, how bad was it?

Konrad Hanschmidt: So, 2013 saw a third consecutive drop in the overall global market trading value and only 40 billion euros of carbon credits changed hands, and that is less than half of the peak in 2011 when the trading value was about 100 billion and about a third less than it was in 2012. The main reason for that is really a big drop-off in prices in the key markets.

If you look at the Kyoto offset markets, then prices collapsed to nearly zero. If you look at the european market, the price went from about 10 euros per ton to about five euros per ton. Although some of that, the loss was limited by an actual increase in trading volumes which was a positive side to the market.

2014, any better?

Konrad Hanschmidt: In 2014, Europe will be taking all the weight on. It will be the main market and policymakers in Europe are very determined to actually reform the market and actually they will probably take on a decision today to significantly cut the supply.

And we see that will increase prices again by approximately 50% this year.

And as a result, we will see an increase in the global market value up to around 46 billion next year and potentially a bit more in the subsequent years after that.

So things are improving but kind of only a little bit. What’s it going to take for this story to really take off, to get back to the kind of idea we first started with?

Konrad Hanschmidt: I think climate policy overall has to be picking up. This might have to happen more on a country level rather than a global level, but we are already seeing markets in Asia, Chinese pilot schemes, South Korea will launch its carbon market next year, and North America is making a lot of progress by expanding their carbon markets as well.

So I think we need to see a bit more bottom-up carbon market initiatives and overall a bit more credibility to the market as well, which we’re seeing from Europe right now which is reforming its carbon market, making it more credible, decreasing the supply and also making it more flexible to the overall economic system.

So if we get more bottom-up systems and if we get a bit more reform of the existing designs then we could see a significant pick up in the market value soon.

Frankly, who cares about market values. The purpose of the scheme(s) is to reduce carbon use whilst boosting the fortunes of more efficient users. Which is actually pretty dumb anyway as it’s just allowed big polluters to drive down their penalty costs instead of improving their own efficiencies.